International Free Trade

Since international trade became a relevant force in economies around the world, there have been many theories and models created in order to explore the best way to conduct international commerce. Near the end of the 15th century, the fall of feudalism led to further development of a true international marketplace. The voyages carried out by Christopher Columbus opened new opportunities to for the west to trade with Asia and the Americas; Mercantilism was born in the wake. Mercantilism is an economic theory that international trade should be aimed at the accumulation of specie, or tradable currency, in an attempt to increase a nation’s value. Mercantilism led to a large push for exports and restraints on imports so that a country could acquire more monetary currency. Mercantilism was succeeded by the ideas of classical economists, notable Adam Smith, whose research shines light on the true value of an economy. In his famous work, The Wealth of Nations, Adam Smith revealed the devastating affects that mercantilism had on international trade. Mercantilism often led to retaliatory tariffs that choked international trade. Smith explained that the real wealth of a nation is its trading power. It does not matter as much how many dollars a country has, but weather that country is worth trading with. Greater prosperity could be reached by utilizing more of the world’s resources. Thee core of modern economics still relies on most of the teachings of Adam Smith, especially in the western capitalism.

20th Century International Trade

The 20th century brought about a growth of trade in services and a rise in production and trade by multinational firms. The distinguishing factor between the 19th and 20th century trade however remains the relevance of the multinational corporation. Prior to the 20th century, there were only Portfolio investments, which are investments in the form of a group of assets. Trading barriers were taken down and transportation costs were cheaper. Multinational trade contracts were signed, notably the General Agreement of Tariffs and Trade (GATT), the North American Free Trade Agreement (NAFTA), the European Union (EU), and the World Trade Organization (WTO). Modern globalization stumbled in the aftermath of WW1. Many European dominated networks responded sharply to threats of the “others”, and some would classify their reaction as declaring themselves guardians of universal morality and law. After WW2 politicians around the world worked to break down trade barriers. The Bretton Woods conference was held in 1944, which represented an international agreement between 44 of the worlds more relevant nations to create a trading framework for international finance and commerce. As a result, there were several international institutions erected to oversee the progress of globalization. Multinational Corporations largely led the charge for globalization and international trade of science, information, and technological products drove prosperity of many national up rapidly. Since World War II, barriers to international trade have been considerably lowered through international agreements

International Economics Today

International trade plays a tremendous role in the American economy and the wellbeing of its citizens. A report published by the Unites States Chamber of commerce explains “The U.S. is the world’s largest exporter of goods and services, exporting over $2.3 trillion in 2014, according to the U.S. Department of Commerce. Over 38 million American jobs depend on trade, and with around 95% of the world’s population living outside of the U.S., there is an abundance of opportunity for the country in international trade, particularly in the manufacturing, services and agriculture industries.” () Since then, China has become the world’s largest exporter, with over 2 trillion dollars of exports in 2017. Modern technology and transportation have made international trade more accessible than ever.

Recently however, uncertainty in the status of international trade has become the norm. 2018 will likely being changes to long-standing trade relations between the world’s leading contributors. Renegotiations are likely to take place for many international trade agreements, including NAFTA, the U.S.-Korea Free Trade Agreement (KORUS), and the Trans Pacific Partnership (TPP).

The Great Divide

In America there seems to be disconnect between economist and citizens about the best economic plan for the country. The disconnect is rooted deeper than the constant and current political conversation, and the conversation must maintain its focus on combating deeper concerns than tariff rates on steal. To put it simply, the American Public is not aware of the nuances involved in free trade.

The American public blames trade for many of its woes. While trade was a large factor in the 1980s and 1990s, in this century the technology and automation have caused the vast majority of job losses. Americans are more accepting of job losses to technology than to trade. This is an important point because it has not always been the case. For example, the industrialization period brought tremendous outrage from manufacturing workers who were disenfranchised. Today however, the public is less willing to cope with job leaving the country than jobs being replaced by technology. Protectionist policies and trade restrictions are becoming a more acceptable idea to many citizens and this will have large ramifications. The being carried by the American Pubic is not that free trade is unproductive for the entire country. It is however that the negative effects that free trade brings on some individuals is justification for the rejection of free trade altogether.

Economists must be specific in addressing the concerns of the public because the public is not totally misinformed. In general, the American public understands how specification and trade can allow for a wider and more affordable product basket. The public is also in overwhelming support of exportation. The disconnect comes from a lack of understanding in the effects of free trade, especially in the long term.

The Nuance of Free Trade

In order to understand free trade and the complexities of a structure that is pursuing a free trade model, one must be willing to have a difficult conversation. Economic policy is not an easy thing to understand and individuals often oversimplify concepts to make them more practical. For instance, a mostly open trade policy is often considered to be efficient economically, but a totally open trade policy is almost never put into practice. A conversation regarding the best economic trading policy should be carried out in a two-step process. The first step is dedicated to understanding the most economically efficient way of trading, and the next step is to communicate and adjust the policy so that it does not encroach on immovable societal values. High restriction trading leads to economic inefficiently and threatens the financial security of a nation, while totally free trade policies leave systems vulnerable to supporting destructive industries and disenfranchising members of the domestic community.

Most economists will agree with Ricardian Economics, especially as they pertain to international trade. David Ricardo was a English stock broker turned economist who developed a trade theory based on comparative advantage ad specialization. These two concepts challenged the popular mercantilism that was common practice during his life. His famous example of trade between Portugal and England explained the benefits of trade for all countries dependent on comparative advantage. David Ricardo developed this international trade theory based in comparative advantage and specialization, two concepts that broke with mercantilism that until then was the ruling economic doctrine. He introduced this theory for the first time in his book “On the Principles of Political Economy and Taxation”, 1817, using a simple numerical example concerning the trade between Portugal and the England in the following way:

• Labor costs per unit of cloth (C) and wine (W) produced by England (E) and Portugal (P) are represented on the graph below. Though Portugal has an absolute advantage in the production of both goods, England has the comparative advantage in the production of cloth. Since a comparative advantage exists in each country, specialization would create a larger supply of both goods internationally than if each country produced and consumed only domestic products.

Ricardian way

From this understanding, Ricardo was able to explain how international trading would increase the production possibilities frontier, which is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors. In absence of trade, each country would only be able to produce and consume what it produced, and that would be greatly less than it would be able to consume if they practiced international trade.

If Portugal specialized in wine production and England specialized in cloth and each country traded its surplus to the other, than the world goods basket would be richer. Economic efficiency does not mean that every individual in the economy will be impacted the same way. The English wine producers will be very hesitant of international trade because it would mean that they have to compete with Portuguese vineyards that have to smaller opportunity costs to produce wine. These truths translate to today, with manufacturing communities often supporting protectionist policies that support an industry that is threatened by uninterrupted trade.

Gains from trade is greater when comparative advantages are greater, therefore small and focused economies would see greater gains from international trade, and that is why they often play a responsive role to larger economies. This theory is incredibly sound and still remains some of the most relevant information in modern economic trading policy. Ricardian therefore proves its viability as the most efficient trading policy, but that is only the first step in the conversation. John Stewart mills is credited for some of the most constructive criticisms of Ricardian economics in his work On the Principles of Political Economy and Taxation (1817). John Stuart Mill was concerned with reciprocal demand as he argued that it was not necessarily true that demand and supply across countries would be met. Ricardian theory is not the divine stone tablet by which to coordinate international trade. The theory of comparative costs may shoe the limits of trading equilibrium, but it does not thoroughly explain the process by which a country should determine terms of trade. Implementation of Ricardian trade theory therefor, must be intentional and molded to fit the structure of each individual economy.

Economic prosperity is not the only type of prosperity that a society is interested in; there are many different factors that contribute to the overall prosperity of a nation. An excellent example of an economic forfeit is the United State’s embargo on Cuba. The Cuban Revolution caused the United States to enforce a series of trade and travel restrictions on Cuba in 1962. The longest trade embargo in history was intended to force Cuba into economic isolation and destruct the Castro government. The statutes prohibit the majority of imports and exports between the Unites States and Cuba. According to the US Chamber of Commerce, the embargo costs the U.S. economy $1.2 billion annually, and the Cuba cites its total economic losses at over $750 billion. The embargo clearly shoes the sacrifice that countries are willing to make economically for different prosperity platforms. The same could be said for trade relations with potentially dangerous countries, as supporting their economy might require forfeits on national security. It becomes clear that a Ricardian economic model is a starting point from witch to be adapted.

Conclusion

International trade is the one of the most productive practices that a country can utilize in an effort to better the welfare of its citizens. It is important to understand the complexities and nuance of a free trade model however, because free trade, though productive on a communal level, will often put domestic contributors at a disadvantage. Since the fall of mercantilism, society has had different responses to free trade and its effect on domestic production. In the Industrial Revolution, free trade was generally supported while technological advancements were seen as harmful. Recently, free trade has received criticism as some believe it to disenfranchise domestic production. The common thread in all of these societal concerns is that free trade models are societies unwillingness to forfeit the negatives that come from free trade in order to gain the benefits. This being said, free trade and Ricardian economics should be tailored to an individual economy and continually molded to fit the current situation. This places a sizeable responsibility on the shoulders of lobbyist and policy makers to fit transform the Ricardian model for trade into a practical trade policy for the time. It is also important to note that trade policy primarily concerned with the economic wellbeing of the home state, but that is not the only concern. Economist must be aware that the general population will think of free trade as more of a multifaceted problem than a purely economic one. Domestic loyalty, national security, and job security are very likely to influence the discussion for the public while only remaining side notes for economists. The public must also be aware of the benefits of free trade and appreciate how different economies can help each other by attributing to the international market place.         

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